New Rules for Seller Fianncing

Posted by Lance on May 28th, 2013

The Dodd-Frank Act amended the Truth-In-Lending Act and established some new rules and regulations concerning seller financing. These new rules appear under the Loan Originator Compensation Requirements under the Truth in Lending Act that was issued January 2013. Read it here: Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z)

These rules only apply to property that includes a dwelling that the buyer is going to reside in. There are no new rules that effect seller financed transactions that include vacant land, commercial property, multi-family and single family residence where the buyer does not plan to move into the property. Most people only use seller financing a few times during their lifetime. Therefore, these new rules will not have any effect on the vast majority of property owners that offer seller financing. These new rules do not go into effect until January 10, 2014.

If you use seller financing to finance the purchase of a property with a dwelling where the buyer is going to reside you are now considered a loan originator. The following are two exclusions. If you follow these rules then you will not have to become a loan originator.

Exclusion #1

Here are the guidelines for those who plan to sell only one property in a 12 month period.

1. The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate or trust and serves as security for the financing. A natural person is in an individual; it is not an entity like an LLC, S-Corp, Partnership, etc.

2. The natural person, estate or trust has not constructed, or acted as a contractor for the construction, of a residence on the property in the ordinary course of business of the person.

3. The natural person, estate or trust provides seller financing that meets the following requirements:

a) The financing has a repayment schedule that does not result in negative amortization. (A balloon payment is permitted),

b) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases and provides for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as US Treasury or LIBOR. An annual rate increase of up to two percent with a lifetime cap of 6 points is considered reasonable

c) The seller does not have to determine if the buyer has a reasonable ability to repay.

As you can see the only thing that has changed for seller financing in the above exclusion is the adjustable interest rate requirement. Most seller financed transactions have always used fixed rates anyway. This just tells you how to structure the interest rate if an adjustable rate is used. This will have very little impact on seller financing.

Exclusion #2

Here are the guidelines for those who plan to sell up to three properties in a 12 month period.

1. The person provides seller financing for the sale of three or fewer properties in any 12 month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing. A person includes a natural person, trust, estates, LLC, S-Corp, partnership, etc.

2. The person has not constructed, or acted as a contractor for the construction, of a residence on the property in the ordinary course of business of the person.

3. The person provides seller financing that meets the following requirements:

a) The financing is fully amortizing. A balloon payment is NOT permitted

b) The financing is one that the person determines in good faith the consumer has a reasonable ability to repay. This regulation does not require retaining documentation of the determination. There is no standard for debt to income ratio or credit score.

c) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases and provides for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as US Treasury or LIBOR. An annual rate increase of up to two percent with a lifetime cap of 6 points is considered reasonable.

If you are planning to offer seller financing on more than three properties within a 12 month period that have a dwelling in which the buyer is going to reside or for further clarification and interpretation you should contact the Consumer Financial Protection Bureau at (202)435-7700 or via email at [email protected]

 

 

I am not an attorney and am not giving legal advice.